China has the potential to be world's biggest market for renewable energy and resource management

After 30 years of formidable economic growth, China has transformed itself into a colossal and resilient economy. However, economic development has come at significant environmental cost.

Although emissions per capita are still low relative to those in most developed countries, China is now the world's largest emitter of greenhouse gases, responsible for over 20 percent of annual CO2 emissions from the burning of fossil fuels. Moreover, China faces water scarcity and pollution problems.

Realizing the necessity and importance of sustainable development, the Chinese government has given the development of green business top priority. China invested nearly twice as much as the United States last year in renewable energy. Given China's economic prowess, it could become the world's biggest green market.

Policy instruments

The government has a crucial leadership role in encouraging green technology development. There are policy instruments available to address every dimension of the value chain, including research and development, equipment manufacturing, design and installation, financing, power generation, transmission and distribution, and end use. These instruments can be applied to technology, financing, grid parity, integration and behavior.

Yet that is part of the challenge. Green technology is a vast and sprawling industry, which ranges from the retrofitting of installations in older buildings and developing wind farms through to the complex world of carbon finance and carbon trading. We believe there are four areas where the government needs to make a decision on the path the country will take:

The first concerns demand and supply. Do government officials want to support energy generators (a feed-in system), or do they want to support green energy consumers, through pricing, for instance?

The second revolves around the question of voluntary versus regulatory. Should government officials pursue a voluntary emissions trading scheme and government tenders for innovation, for example, or introduce mandatory requirements like quota obligations in the energy generation mix?

The third concerns generation versus capacity instruments. Should government officials promote megawatt-based systems, with subsidies and investment, or megawatt per hour systems, meaning quota obligations?

Finally, there is the direct versus indirect option. Should direct investment incentives be used or taxes and voluntary emissions reduction programs?

The right regulatory path depends largely on the development stage of specific industries. In the fledgling days, governments are wise to provide early-stage grants and other research funds to help new technologies to develop. In the growth phase, governments should use their influence to steer the direction of research into specific areas. In the later consolidation phase, State programs can be instrumental in retaining the share of certain value-added domestic activities. China's green technology industry can be divided into six sectors: Environmentally friendly power generation and storage, energy efficiency, material efficiency, waste management and recycling, sustainable water management, and sustainable mobility.

Power generation and storage

Green technologies in the field of environmentally friendly power generation and storage are used to reduce CO2 emissions, to scale back dependence on fossil fuels, and to make power generation more sustainable. The following technologies can be seen as examples of products in this market: Efficient power plant technologies, such as gas and steam power plants; renewable energy, such as hydropower, wind and photovoltaic; energy storage technologies; and fuel cell applications.

Given that over 80 percent of the country's electric power is still produced by burning coal, China has made developing "clean coal" one of its highest priorities. Emissions of gas or coal power plants can be reduced significantly by employing more efficient turbines and filter systems to cut the emissions of flue gases.

China has tremendous potential not only to make conventional energy sources cleaner, but also to increase the share of renewable energies in its power generation mix. According to the Middle and Long-term Development Plan for Renewable Energy in China, the government aims to boost the share of electricity generated from renewable sources to 15 percent by 2020. The country's investment in renewable energy could reach 3 trillion yuan (345 billion euros) by 2020. Its green stimulus package is already one of the largest in the world and has stimulated rapid innovation and the founding of dozens of green technology companies within the last couple of years. Chinese renewable energy companies Sinovel, Goldwind, Suntech, Yingli and Trina Solar are all global top 10 players within their industries for instance.

China's wind power capacity has doubled for four consecutive years since 2005, with China now ranking second in the world and representing 10 percent of the total global installed capacity. It is estimated that the target of 30 gigawatts (gW) of cumulative installed wind capacity by 2020 will be achieved by 2012.

Energy efficiency

Improving the energy efficiency of production processes, products and buildings can also greatly reduce CO2 emissions. A broad definition of energy-efficiency technologies includes a wide array of different product segments, including insulation materials and building services, energy-efficient products, energy-efficient cooling systems and energy services such as contracting and consulting.

China's Top 1,000 Energy Consuming Enterprises Program (2006-2010) focuses on raising energy efficiency across the country's 1,000 largest industrial energy consumers, which cumulatively account for 33 percent of China's energy consumption and 43 percent of China's CO2 emissions.

Massive urbanization will continue over the next 15 years. This provides a golden opportunity to introduce energy-efficient buildings on a scale unimaginable in Europe or the US. The Chinese government has already announced its desire to reduce the energy consumption of new buildings, requiring newly built houses to be 65 percent more energy efficient by 2020. Lighting subsidies are being distributed to encourage energy efficient lighting products and recycling efforts are being stepped up.

China's expanding middle class means that great strides can be made in making energy-efficient appliances more widespread and making buildings more environmentally friendly.

However, up to now, local consumers have been reluctant to adopt innovative solutions if they're priced higher. Only a very few are willing to pay more for reduced emissions and energy conservation. However, advances are being made. The Haier Group, China's leading electrical appliance manufacturer, for instance, is pioneering a new generation of energy-efficient appliances and is endeavoring to make energy conservation and environmental protection technologies popular. Its success lies in managing to combine low-cost manufacturing with advanced technology.

Material efficiency

Material efficiency is the ratio between material output and material input per unit of production. That means that the less material companies use to produce a certain volume of output, the greater their material efficiency. To improve material efficiency it is crucial to design products that require fewer materials in the first place, while optimizing production processes so that they waste less material.

China lags behind some developed countries, such as Germany, which has developed innovative solutions for a wide range of different applications, such as: Bio-plastics to replace fossil fuel-based plastics, insulation systems using wool or brown coal waste. However, Chinese companies in the construction industry are using more innovative construction techniques to use materials more efficiently.

Waste management and recycling

This market refers to reducing and recycling waste, as well as disposing of unavoidable and non-recyclable waste in environmentally friendly ways. There are basically two options for recycling waste: Material recovery and energy recovery. Material recovery involves recovering raw and basic materials from waste and feeding them back into the production loop. Energy recovery involves using waste to produce energy. China needs to aggressively develop this market, out of necessity - there is a shortage of locations for domestic landfill sites.

In this particular market, China also lags behind developed countries such as France and Germany. Chinese companies have not developed as integrated waste management companies, such as the UK's leading recycling and waste management company Veolia Environmental Services, which deals with everything from wastewater to toxic waste. China aims to develop this segment significantly in the next five years.

Sustainable water management

Securing supplies of clean water has become one of the greatest challenges faced by China. Examples for the relevant technologies in this market are innovative planning and project management for installing and maintaining water distribution networks and systems, technologies to reuse rainwater and slightly polluted water, mechanical and biological treatment of wastewater, and modern seawater desalination technologies.

China has huge potential in this market, due to its size and highest population worldwide. Chinese companies, however, are still in the early stage of developing scale and solution offerings.

The author is partner of Rolandberger Consulting Group.